Any disaster of the magnitude of AMRI or Bhopal is a matter of deep concern, and while it calls for preventive and punitive actions as may be warranted, the current witch-hunt is somewhat over the top. Six non-executive directors arrested within days of the incident and are languishing behind bars, the seventh under judicial custody in a hospital. Two months later, the Managing Director, Dr Chettri, and another director, Dr Dasgupta were arrested. Chettri has been granted bail, presumably on grounds of age, but there is no relief for the others, including Dasgupta, till date. Three whole time directors, two of whom are appointees and family members of the promoters, are believed to be absconding. Possibly the detention of all others is intended to pressurise the absconders to surrender.
In order to justify the continuing detention and more importantly, denial of bail, it’s for the investigator to establish that all Board members were vicariously or otherwise liable for the disaster, and whether there is any basis for apprehension that these persons are likely to tamper with evidence. It appears none of these processes have been initiated, let alone complied with – and as the representation made by FICCI to the State Government, puts it, there is a feel of “victimisation and absence of transparency”.
This incident has occurred at a time when the final version of the Companies Bill is in the process of being touched up, before introduction in Parliament, in the Budget session. The new Act is heavily focussed on Corporate Governance, providing for appointment of independent directors on the lines of Clause 49 of the Listing Agreement for all companies having a specific threshold of paid up capital.
The Irani Committee’s recommendation was to treat independent directors as non-executives who would not hold an office of profit. The assumption is therefore that to be impartial there should be no financial nexus. There is no doubt, by reason of their special talents and capabilities, independent directors provide value addition and credibility to the Board. Nonetheless, they are expected to bring on board their skills and brand without any tangible returns, other than selfless satisfaction. Some are financially in a position of strength and do not expect freebies, but the law has to address this issue for the others. Of those arrested, Dasgupta is the only one of the many high profile independent directors, but also the only medical doctor. The others, barring Chettri, though equally high profile, have not been targeted.
Going by the book, one would have assumed Chettri would be first target as the managing director (MD). One wonders whether he was entirely cognizant about the implications of the MD’s office, and the baggage that goes with it. He may have to actually undergo trial to establish his innocence, unless the investigations draw a blank. The law categorically provides that if a company has no MD which is not the case, then each director is responsible for breaches. Here the non-executive directors were first to be targeted possibly, because of their connection with the promoters.
Situations where an independent director, chairs or is a member of the Audit or Safety Committee, he has a tough task – he is the watchdog representing the interests of stakeholders of the company, its best practices in governance, and cannot give a disclaimer on grounds of being “independent” and/or “non-executive”. Even otherwise, had the issue of fire safety been escalated to the Board, independent directors would be expected to voice and record their concern. What is required is a balance – while independence is critical to improve governance process, it is equally important that the director understands that his role in promoting the success of the enterprise is equally important.
Its’ not that the lawmakers and courts are impervious to this dichotomy. The Ministry of Company Affairs (MCA) had issued a Circular No. 08/2011 dated March 25, 2011, clarifying that in case of Independent directors for listed companies are “not charged with the responsibility” and will not be liable for any act of omission or commission by the company or its officer(s), provided it can be established that such act occurred without consent or knowledge, which includes the Board processes and has acted diligently. The Registrars of Companies have been cautioned to exercise extra care in exercising their powers in accusing such directors as “officers in default”.
As on date, the law envisages certain liabilities on directors under special law such as the Negotiable Instruments Act, where again the courts have come down heavily on victimisation. The Companies Act provides for the “officers in default” to include Managing and whole time director(s) and the new bill proposes to enlarge the scope. As regards any case made out for vicarious liability, the Supreme Court has consistently held that it is “not sufficient to make a bald cursory statement in a complaint that the Director is responsible for the offence…” The complaint should spell out as to how and in what manner “the accused was responsible” (National Small Industries Corporation Ltd vs Paintal), and that “vicarious liability” must be pleaded and proved and not inferred.
Perhaps an appropriate legal mechanism for addressing corporate manslaughter and homicide, arising out of the duty of care any corporation owes to its consumers and employees should be part of the Corporate Governance reforms.
The UK Corporate Manslaughter and Homicide Act, 2007, adopt a very different approach towards deaths due to gross breach of care owed by the organisation, from that of Section 299 of the Indian Penal Code.
On conviction, a Corporation may be ordered to remedy its breach, publicise its failure and/ or be imposed with an unlimited fine. No individual is to be held liable whether by aiding, abetting or participating in such act though the shareholder may end up picking up the tab.
I am not very sure whether this is the right time to moot this. But it maybe worth considering – a more effective better deterrent than random arrests.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in
